TMFRhino (98.43)

3 Tech Stocks Even Buffett Could Love

9

Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) has never been keen on investing in technology stocks. He ignored the frothing dot-com bubble to instead shop for traditional businesses like MidAmerican Energy and Benjamin Moore Paint. In the aftermath of the tech-fueled market collapse Buffett looked like an absolute genius, but his aversion to investing in high technology is more deeply rooted than a one-time bubble.

Two main reasons for Buffett's distaste for technology stocks stand out:

- As a value investor, Warren would rather pay for companies with hard assets that provide him a margin of safety. Since technology stocks often rely on intellectual property of nebulous value and heady growth assumptions, they’re less attractive to his investing style.

-Warren likes to buy companies he understands, and technology stocks are well outside his core competency of consumer goods, industrials, and insurance and banking.

Still, throughout his investing career Warren has shown an ability to re-invent his investing style. He branched out from the teachings of Ben Graham to understand the value of a strong brand. Later, Charlie Munger shifted Warren away from buying “cigar butts” (IE- Decaying businesses selling at excessively low prices) to excellent businesses selling at a “fair price.”

With that in mind, there are a number of technology stocks today that even Warren Buffett could love. Not that he’s in the market for a high-tech buying spree, but here’s three stocks that exemplify qualities the Oracle himself appreciates.

1.) IBM (NYSE: IBM) - IBM has a number of qualities that Warren would find extremely attractive. Its brand, built through decades of technology leadership, still is synonymous with cutting edge technology solutions. Through its hardware-plus-software-plus-services model, IBM becomes a one-stop vendor with extremely high switching costs for large enterprises.

Beyond that, Buffett also values strong tenured leadership at the front of his favored organizations. IBM has been led by Samuel Palmisano since the beginning of 2002. Under his stewardship, the company has relentlessly squeezed new efficiencies out of a lumbering bureaucracy, nearly doubling operating margins and entering new high-margin areas that support its pre-eminent position in the world’s data centers. The cherry on this delicious investment cake? It’s priced right, just 12.5 times trailing earnings.

2.) Google (Nasdaq: GOOG)- I know this might sound crazy, after all, Google is one of the greatest growth stories of the past decade; not exactly Buffett’s cup of tea. However, weigh these quotes from Warren and Charlie Munger at the press conference following Berkshire’s shareholder meeting last year before making any Google judgements:

Charlie Munger: “Google has a huge new moat. I’ve probably never seen such a moat"

Warren Buffett: “Some keywords cost $70 for a click, and this creates its own positive feedback loop and momentum, that’s an incredible business”

Charlie Munger: “It’s a wide moat, full of sharks and alligators, and it’s getting wider.”

What both Buffett and Munger realize is that like operating systems, there are numerous traits that lead search to be a natural monopoly. Beyond the advertising pricing positive feedback loop Buffett alluded to; there are also exorbitant costs to creating and maintaining a data center that can provide speedy search results. These costs make it exorbitantly expensive for new entrants to build out the computing scale necessary for search at this point. Also, the more data a search provider has, the more relevant its results. Whoever has a dominant share should only see the quality of results lap their lesser competitors.

The list goes on and on until you realize that Google controls a market whose dynamics lead to a single, dominant player. With all this in mind, Google is trading at only 10% above the S&P 500’s aggregate forward P/E ratio . What was that phrase again? Oh yes, “a fair price for an excellent business.”

3.) Activision Blizzard (Nasdaq: ATVI)- From the point of view of understanding a business, Activision Blizzard isn’t overly complex. While the technology behind video games might be daunting, at their core video games are a leisure activity. Still, you don’t see Buffett investing in movie studios or other companies fighting for consumers entertainment dollars. That’s largely because the economics of the industry haven’t been great. Companies have lumpy cash flows, and knowing which company will strike a streak of hits is more luck of the draw than some sort of bankable competitive advantage.

However, Activision Blizzard has created a new, powerful business model in the gaming industry. Through its robust World of Warcraft series, it draws a recurring, consistent cash flow stream. In addition, the company’s focus on quality has led to a slew of popular gaming series that can dependably deliver excellent results for years to come.

While technology might not be dominating Berkshire Hathaway’s portfolio anytime soon, there’s a number of quality companies out there with traits that even a crusty old value investor like Buffett could love. If you’re looking for deals in today’s market, don’t overlook some of the winners in this rapidly recovering sector.